Debt To Equity ratio for FRA CBCS Students

As we covered above, shareholders' equity is total assets minus total liabilities. However, this is not the same value as total assets minus total debt because the payment terms of the debt should also be taken into account when assessing the overall financial health of a company.
Short-term debt consists of liabilities that will be paid in under a year. Long-term debt consists of liabilities that will take a year or under to mature. Let's walk through an example.
Company A has $2 million in short-term debt and $1 million in long-term debt. Company B has $1 million in short-term debt and $2 million in long-term debt. Both companies have $3 million in debt and $3.1 million in shareholder equity giving them both a debt to equity ratio of 1.03.
However, because short-term debt is renewed more often, having greater short-term debt compared to long-term debt is considered risky, especially with fluctuating interest rates. With this in mind, Company B would be considered less risky because it has more long-term debt, which is considered more stable.
Here's a reference to help you remember the long-term debt to equity ratio formula.
How to calculate long-term debt to equity ratio
Examples of long-term debt include mortgages, bonds, and bank debt. Just like the standard debt to equity ratio, investing in a business is riskier if it has a high ratio.
The debt to equity ratio is a valuable tool for entrepreneurs and investors, and it shows how much a business relies on debt to finance its purchases and business activities. If you're interested in entrepreneurship, learn about how to start a business next.

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